Debt Financing, Governance Mechanisms In China's Listed Companies

Debt financing is an important financing method. Debt is positive to corporate governance in standard finance theories, for it can constrain the agency cost of manager. We test the corporate governance effect of debt financing theoretically and empirically, within special institutional settings of China.Firstly, we demonstrate on three agency conflicts in modern firm, and the institutional background in China and the effect of debt on corporate governance. Then we describe the characteristics of debt and agency costs of manager in our listed companies. The thesis then makes a empirical study on the corporate governance effect of debt financing during the period of 1995-2007. We intend to test whether debt constrains the agency costs in China, just like what happened abroad. We use three panels: 1995-1998, 1998-2001, 2002-2007. We find that before 2002, long-term loan strengthens manager's agency costs, while it constrains agency costs of manager afterwards. Short-term loan demonstrates different effects from long-term loan on corporate governance, it strengthens manager's agency costs before 2002 but the effect is not significant afterwards. We introduce administration expense-wealthchange sensitivity in robustness checks for there maybe exists proper expenditure in administration expenses. We find that debt ratio is negative to administration expense-wealthchange sensitivity, that is, debt constrains manager's agency costs in China. Meanwhile, we find that companies with defective audit, stated controlling shareholder, and larger size show higher administration expenses.